Warrants: pricing is wrong

A few days ago, I went to a seminar on the design of China's stock index futures contracts held by the government. The content of the seminar has nothing to do with this article. You can not follow the table below. But too many of them always talk about stock index futures with warrants, which is nothing more than that the warrant market is the most speculative market in China. When a piece of waste paper is speculated to two yuan, the price of put and call goes up together, which makes me feel that it is not like a seminar on futures index contracts, but rather like a protest conference on warrants.

In my opinion, the pricing of China's warrant market at this stage is indeed wrong. Before I elaborate on this conclusion, I have to give a definition of "pricing error". My definition of "pricing error" is that the transaction price of some warrants has been significantly far away from the theoretical value I think. Why is it the value I think? It's very simple. The transaction price is easy to get, but the theoretical value is hard to find. Each investor has its own judgment standard for the theoretical value of warrants, and different parameters of the same model will have different theoretical values. Therefore, for the sake of simplicity and avoiding too many disputes, I will first give the so-called "pricing error" overlord clause.

There are two main manifestations of pricing errors in the warrant market. One is that its own pricing is somewhat high, such as Capital Warrant, Baotou Steel's subscription Youngor ( information quotation forum ) Subscription, its implied volatility is indeed at a high level. Second, there is a large difference in the implied volatility between the call warrant and the put warrant of the same positive share. For example, based on our own parameters and the closing price on October 17, Baotou Steel's put warrant ( information quotation forum ) The implied volatility of ( information quotation forum ) The implied volatility of Youngor put is 85.8% ( information quotation forum ) The implied volatility of is 132.5%. In any case, this should be considered as a pricing error in the warrant market. One problem that is often ridiculed by journalists in the warrant market is that the simultaneous rise and fall of regular stock put and subscription is also considered to be a pricing error in the warrant market, although I don't think it is a pricing error. ( See>>for data )。

Think about it carefully. In my opinion, is it really the warrant's fault that the warrant market pricing is wrong? First of all, the warrant market is a fully competitive auction market. Every investor bids according to his own will. There is no terrorist holding a gun behind you to force you to buy a warrant with a volatility of up to 130%, and there is no prohibition on you to sell your warrants at a high price. In other words, in the "Dutch tulip" incident, is the high price the fault of tulips? Is it the fault of stocks when the average P/E ratio of China's stock market was 80 to 90 times in the 1990s?

In fact, the reason is very simple. No matter what kind of commodity, its transaction price depends on the value of the commodity itself, but it is also related to the supply and demand of the commodity. In the securities market lacking of speculative products, the emergence of more speculative warrants will certainly lead to greater speculative demand. In the initial stage of the market, the supply of warrants is relatively limited, so the relationship between supply and demand plays a decisive role in the price of warrants in a short time, and the impact of the intrinsic value of warrants on the price of warrants is relatively weak. In addition, in the process of determining the supply and demand relationship of ordinary commodities, when the demand for commodities is greater than the supply price, the demand for commodities decreases and the supply increases, making the rational return of commodity prices. However, in a relatively short-term warrant market, the supply of warrants is relatively fixed, and the demand for warrants will not decrease because the price of warrants becomes higher. On the contrary, the demand for warrants depends on investors' expectations of the direction of short-term changes in the price of warrants. If investors believe that the price of warrants will rise, all investors will buy warrants, which will lead to the rise of the price of warrants, and the rise of the price of warrants confirms investors' expectations. It is not surprising that in a market with relatively fixed supply, the price of warrants is far away from their value and is influenced by the supply and demand of warrants.

Therefore, the main reasons for warrant pricing errors are very clear. That is, the warrant market cannot provide a fast and effective supply mechanism to change the understanding of warrant investors on the relationship between supply and demand of warrants and the expectation of price changes. (Zhang Biao)

    Related links: Zhang Biao's Column

(The author is the general manager of Guotai Junan Securities Derivatives Department)